|
    
|
ECONOMY : RELATED DATA The Recession of the Recovery Recovering to a Recession The growth train has derailed. Production is falling in one sector after another. With Budget 98 failing to trigger an industrial revival the economy is on track for a recession. Not all their 'reading', 'riting', and 'rithmetic' appears to be able to tell India's CEOs which of the two other Rs--Recession or Recovery--lies in store for the economy this year. However, twenty-four months after the first post-liberalisation slowdown hit corporate India, a distinct pattern is emerging from the rubble. And, tragically, the future it is driving into seems to be just as bleak as the past, at least in what is left of 1998-99. For, the screeching brakes that have led to decelerating sales since 1995-96 can still be heard even as the rumblings of a resurgence recede. In fact, the forces of retardation that have built up have been powerful enough to stall the growth of the manufacturing sector: from 23.10 per cent in 1995-96 through 15 per cent in 1996-97 to 6.40 per cent in 1997-98. Simultaneously, they have reined in the rate of growth of corporate profitability as well: from 4.40 per cent through 4.30 per cent to 2.80 per cent over the same period of time. Paradoxically, although those early signs in January, 1998, suggested the opposite, subsequent data shows that the economy is not just stuck in the slowdown, but may well be sliding into a recession. Granted, only 1 of the 17 sub-sectors--transport equipment, to be precise--into which the Central Statistical Organisation segregates manufacturing industry actually posted a drop in production in January, 1998, over January, 1997, with the secondary sector growing at the rate of 9.60 per cent that month--a 13-month peak. However, soon after, industry ran into a wall, and, by April, 1998, 6 of the 17 sub-sectors--which account for a weightage of 30.02 per cent in the Index of Industrial Production (IIP)--registered falls in output when compared to April, 1997. Not only did the so-called recovery disappear as suddenly as it had appeared, it laid down no roots either. When BT spoke to CEOs, economists, and managers last month, most were proponents neither of revival nor of recession. If they sat on a fence, it was because every silver lining in the economy now has a dark cloud too. For example, while the disbursals by the financial institutions rose by 31 per cent in 1997-98 over 1996-97, the funds raised through public issues by corporates halved from Rs 13,846 crore in 1996-97 to Rs 7,820 crore in 1997-98. Similarly, while the banks' investments in corporate bonds, shares, and commercial paper rose by Rs 2,557 crore between March 31 and June 20, 1998, the non-food credit extended by them contracted by Rs 9,399 crore during the same period of time. Little wonder, then, that Aniruddha Ray, 53, the Executive Director of the Rs 778-crore Eveready Industries, predicts: "The downturn will not get more severe, but I foresee no major improvement either." Agrees Manoj Panda, 45, Professor, Indira Gandhi Institute for Development Research: "No further downturn is expected, but a recovery will be conditional." Our analysis, based partly on the BT Macro Model, threw up three hypotheses:
Fortunately, agriculture is likely to spring back to the positive growth path in 1998-99. Which will partly compensate for the slow growth of industry. However, even if services grow by 6 per cent, the GDP growth rate will not rise above 5.5 per cent in 1998-99 as compared to 5.3 per cent in 1997-98. And that's the best-case scenario. Is The New index Of Industrial Production Creating A Mirage? January 98's rebound, if any, could have been purely mathematical. With industrial growth now being calibrated by the New IIP--with the sectoral weightages redistributed in line with their changing contribution to industrial production and the base-year being shifted from 1980-81 to 1993-94--the trendline, suddenly, appears to be brighter than before. For instance, while the Old IIP revealed a drop of 0.73 per cent in industrial production in March, 1998, over March, 1997, the New IIP turned that into a growth of 4.04 per cent. In fact, the New IIP suggests that industrial growth has never fallen below 3 per cent in the last 15 months! By that logic, not only is a recession not on the horizon, it is actually receding. Comments S.P. Gupta, 66, Chairman, Society for Economic & Social Research: "By this reasoning, the fears of a recession should be over, and the recovery should not be too distant." Moreover, this index suggests that until a new trajectory is achieved, the economy will continue to maintain its 3-4 per cent orbit. However, the New IIP definitely tends to conceal more than it reveals. Which Sectors Have The Potential To Lead A Recovery? Moreover, the New IIP represents an average that camouflages variations across sectors, straddling both recession-hit and growth-bound industries, and across time-periods. For instance, the 4.04 per cent rate of industrial growth notched up in May, 1998, actually includes, inter alia, jumps of 24 per cent and 20.20 per cent, respectively, in the metal products and tobacco and beverages sectors, and drops of 8.80 per cent and 6.60 per cent in, respectively, the food products and cotton textiles businesses. Likewise, the temporal fluctuations too are sharp. For instance, since April, 1997, the rate of change in capital goods production has gyrated between +20 per cent (April, 1998) and --10.70 per cent (March, 1998), and in consumer durables, between +13.40 per cent (November, 1997) and --61.60 per cent (August, 1997). Points out Vivek Seth, 45, the Director (Finance) of the Rs 1,506-crore Ispat Industries: "In some industries, the downturn is yet to bottom out. In others, an upturn seems definite." Since a recovery, if there is indeed one, is not broad-based,
it makes the identity of the best-performing industries crucial. It may be recalled that
the recovery of 1993-94 was led by the automobiles, drugs and pharmaceuticals, beverages
and tobacco, textiles, and consumer electronics sectors. If it is to repeat itself, some,
or all, these businesses should be at the vanguard of the upturn that the New IIP
indicates. Actually, the top-performers in April, 1998, compared to April, 1997, turn out
to be transport equipment (+ 23.90 per cent), metal products (+25.90 per cent), and
non-metallic minerals (+22.90 per cent). Similarly, the cement industry, which has been mired in a slowdown due to the rising input costs of freight, coal and power as well as depressed prices, is displaying early signs of a revival. Not only have the production and the dispatch of cement risen by 10.80 per cent and 15 per cent, respectively, in April, 1998, over April, 1997, the cement-manufacturers have, finally, been able to raise their retail prices in certain regions. Whether there has been a structural shift in the economy, sending these sectors to the forefront of the revival, isn't clear--yet. What Is Really Holding Back Consumer Demand? For business to sell more, consumers must want not just to buy more, but to spend more. However, the slackening of demand is only accentuating itself. Admits Shekhar Sathe, 47, Chief Executive, Kotak Mahindra Asset Management: "Demand is still the main bottleneck." Of the three broad consumer classes--the urban middle-class, the urban rich, and the rural rich--that can arrest the slowdown, the first is the least likely to make its presence felt in the short run. One tangible reason: the shrinking of the wealth amassed from the investments this class has made since the mid-1980s. Having reposed its money--and faith--in the equity and real-estate booms in this period, in general, and between 1993 and 1995, in particular, it has been the greatest victim of the crashes that have assailed both markets. Thus, the country's largest-spending group--numbering about 192 million in 1997, according to the National Council for Applied Economic Research--has collectively become poorer. Even in the short run, this erosion of consumer wealth has proved to be a drag on the recovery. In April, 1998, for instance, the market capitalisation of the Bombay Stock Exchange--the collective value of the stock held by shareholders--touched a 10-month high of Rs 5,75,982 crore. By the end of June, 1998, that had dropped--thanks, in no small part, to the A.B. Vajpayee Administration's nuclear tests and Budget 98--to Rs 4,85,461 crore, wiping out almost Rs 90,000 crore of wealth. So, a sustained recovery of the stockmarkets would go a long way in restoring buying power. Argues K. Krishnamurty, 62, Professor, Institute of Economic Growth (IEG): "The middle-class urban consumer has huge amounts of income locked in depressed stock and property prices. An upturn there will boost demand substantially." Also cutting into the incomes of the middle-class from the underside is the recent spurt in food prices. Reflected in a rise in the rate of inflation for food products from 5.40 per cent in April, 1998, to 9.10 per cent in June, 1998, spiralling prices are pre-empting consumer spending on durables and non-durables, diverting it to food instead. Without any signs of a downturn in the price-line, low is the possibility of an increase in consumer purchases of the products that will keep industry away from a recession. Sure, the urban rich have been far less affected by the negative wealth effect and rising prices. For the recession to be staved off, however, there must be an increase in demand from this segment of consumers. That, in turn, would require a jump in the earnings of these large spenders, which can, in fact, be contributed only by greater profits from the businesses that sustain their incomes. But, since that improvement in bottomlines is dependent on increased consumer spending, the cycle of deprivation could continue. Which leaves the rural consumer to unlock the doors of demand. With the signs of a normal monsoon being propitious, agricultural output should recover from its fall of 2.50 per cent in 1997-98 to attain a growth rate of 3.1 per cent, according to the BT Forecast (see The BT Post-Budget 98 Economy Forecast, BT, June 7, 1998). However, the resultant increase in rural incomes will not be visible until the end of the year. Reckons Sunil Bhandare, 54, Advisor, Tata Services: "The impact of last year's shrinkage of the agriculture sector will last till about November, 98." Only in the fourth quarter of the year, therefore, can a recovery led by rural spending be initiated. Can Exports Catalyse A Demand Revival? Usually, the antidote to dropping domestic demand is exports. In 1993-94, for instance, although a squeeze in customer spending forced industrial production down to 6 per cent--and, as a result, Gross Domestic Product (GDP) to 5.80 per cent--exports still grew by 19.80 per cent. But global demand is unlikely to step in to halt a recession this time. Having crept up by 1.50 per cent in 1997-98, India's exports actually fell by 17 per cent in May, 1998, over May, 1997--the sharpest in the past 38 months--mocking Union Commerce Minister Ramakrishna Hegde's target of a 20 per cent rate of growth of exports in 1998-99. Evidently, their efforts will not suffice for exporters to compensate for the drop in other sectors. Warns G.V. Ramakrishna, 68, Chairman, Disinvestment Commission: "Only a realistic export promotion package, implemented quickly, can revive external demand." Net-net, a demand-led, volumes-driven hurdle to a recession may be possible, but not probable, to erect in the short run. Volumes, of course, aren't the only vehicle by which to escape a recession; so is value. Even when volumes--a.k.a. units of production--growth is low, a faster rate of growth in prices can dispel the clouds of a slowdown. Inflation, then, could be an unlikely saviour. Corporate India is pinning its hopes on a faster rate of increase in the price of manufactured goods than the present 4 per cent, at which level it barely neutralises the rising costs of production. In such a situation, inflation would lead growth instead of hampering it. "Higher inflation could be just what we need for a recovery. We should learn to live with it in 1998-99," says Panda. Unfortunately, the growth posted in recent months has been driven by discounts--and, by extension, volumes--rather than value. A classic example: the 20-per cent growth in the sales of CTV sets was accomplished primarily by an average discount level of 30 per cent. Analyses D.H. Pai Panandikar, 65, Director-General, RPG Foundation: "The growth in real spending is coming from areas where consumers are getting the most value for their money." If that remains the paradigm for consumer spending in 1998-99, the slide into a recession will only be arrested by lower prices, with volumes having to compensate for thinner margins. What Can The Government Do To Stoke A Recovery? In theory, the A.B. Vajpayee Government's spending
programme--encapsulated in the additional Rs 11,372 crore earmarked as Plan Expenditure
for 1998-99--should act as a demand pill. But the fulfilment quotient of North Block's
expenditure promises has never been high; in 1997-98, for instance, Plan spending fell Rs
2,222 crore short of target. And the avenues earmarked for the GOI's spending are
pock-marked with bureaucratic and policy potholes. From cost-management to strategic refocusing, from competitiveness to the quest for new markets, their internal and external restructuring is taking a toll of corporates. Points out B.B. Bhattacharya, 50, Professor, IEG: "The cyclical and structural problems of industry have lengthened the road to a recovery." Which also means that quick-fixes for warding off a recession will be harmful in the long run since they will offer a lease of life to the weak. Perhaps the best strategy for the government is to inject transparency into its infrastructure policies, clearing the roadblocks for investments in sectors where the demand is high and the supply is inadequate. And also introduce pricing reforms to make it realistic for the private sector to earn money from its investments. Suggests Alok Ray, 49, Professor, Indian Institute of Management, Calcutta: "If the government gets its prices and policies right, the infrastructure sector will deliver growth." Ultimately, the reality-check is the Vajpayee Administration's political stability and its economic clear-sightedness--neither of which has been in evidence in its 150 days in power. With Budget 98 having been passed even as the Opposition appears incapable of toppling the government, time may be on Vajpayee's side. And the rollbacks studding the final version of Budget 98, be they ever so confusing, do point to a crystallisation of North Block's understanding of what the economy needs. Opines Surjit Bhalla, 50, the President of Oxus Research, and, until now, one of the bitterest critics of this Administration: "Both in terms of political stability and economical thinking, I believe that this government has come out of darkness, and my hope is that it will see the light now." Perhaps. After all, in a country where hope is still a cure for blindness, stranger things have been known to happen. --Additional reporting by Swati Kamal, Gautam Chakravorthy & Rakhi Mazumdar |
|
Write to us Subscriptions Syndication INDIA TODAY | INDIA TODAY PLUS | COMPUTERS TODAY © Living Media India Ltd |
